Not knowing what the chart is telling you could cost you considerably at the end of the day. When you begin trading for the first time, it’s easy to become overwhelmed by the charts. Many things are going on at one time, all that provide valuable information to make a successful trade.

One chart type popular amongst traders is the candlestick chart. First started in Japan, this chart style is relatively easy to read and provides lots of information to the user. The name comes from how the chart looks — rectangle shapes with lines coming out of either end resemble what a candle with a wick seems like.

The Rectangles.

As mentioned above, the rectangles on the chart are the candlestick. Each candlestick shows the trader the open price, the highest and lowest it hit for a designated time period, and the closing price. The trader can dictate the time period, ranging from minutes in a day to days in a year.

For example, if you open a candlestick chart with a timeframe of five minutes, you would see a new candlestick (rectangle) for every five minutes in the day.

We know that each candlestick represents the price change in a specified time, but how can you tell the change?

Depending on the price movement (increase or decrease), the top or bottom of the candlestick dictates the open and close price.

You’ll notice that each candlestick is either green for an increase in price or red (sometimes black) for a price decrease. For the green candlestick, the opening price is the bottom, making the top the closing price, and vice versa for the red or black candlestick.

The rectangle shows the price change range, but how can you tell the highest and lowest point in the specified time period?

The Highs and Lows.

Some charts have shadowed rectangles above or below the colored one, while other charts have a thin line from either end of the candlestick, also called the candle’s wick. The shadows or lines represent the highs and lows during the timeframe.

If the candlestick went higher than the open or close price, you’d notice the wick at the top of the candle (the length varies on how high the price went). There will be a wick at the bottom of the candlestick for prices that dropped lower than the open or close.

If you want to calculate the designated time price range, you will subtract the low price from the high price. That number would be the price range movement.

Once you have a basic understanding of the rectangle, color and lines or shadows on the chart, it’s relatively easy to understand. The candlestick chart is excellent for interpreting patterns and spot trading opportunities for maximum profit.

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